The asset management industry faces significant challenges with declining hedge fund fees and increased competition, necessitating strategies such as expansion and operational restructuring. Key recommendations include exploring new fee structures linked to performance, embracing technology for efficiency, and refocusing on compliance. Additionally, firms are encouraged to consider acquisitions and partnerships to adapt to a global market and diversify their offerings.

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Asset management industry
success:
Build, transform and protect
value into 2020
The Future of Growth and the Asset Management Industry

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With downward pressure on hedge fund
fees, it's time for expansion
Hedge fund volume is up — doubled in the past 5 years.
But fees are down and showing every sign of staying there.
Why? And what to do?
Causes are many, as are responsive strategies — the strongest
might be expansion.

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Fee aggregates dropped between 2015 and 20171
Management Performance
2015 2% 20%
2017 1% 18%
Management fees dropped 2016–2017, according to 57% of investors.2
1 Hedge Fund Journal report
2 Credit Suisse survey
Fees have fallen

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Top fee pressures
Lower returns
Stiffer competition
Trade-off of lower liquidity
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With downward pressure on hedge
fund fees, time is right for expansion

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Top fee pressures
Lower returns
Stiffer competition
Trade-off of lower liquidity
4% annually 2012–2017, compared to 14% for S&P 500 Index
29% of AUM in passive investments in early 2017
31% hard lock-up required, compared with 16% in 2015
according to Seward & Kissel 2016 New Hedge Fund Study

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Reshape your business
Find a thriving future via routes other than traditional fees:
• Explore new fees and structures
• Revise operations
• Refocus on compliance
• Consider expansion
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Reignite Growth in Asset Management

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Explore new fees and structures
• Link fees to performance metrics
Investors expect fees to be reduced when performance drops
• Offer discounted fees for more permanent capital
Challenge the 90-day liquidity norm
• Diversify offerings
Expand, and explore hybrid models (traditional + alternative investment)
Create for near wealthy investors, e.g., 1-and-10 fee for < $100,000 net worth

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Revise operations
• Scrutinize back office processes, tighten internal controls
For time/cost savings, and efficiency/response to SEC and DoL inquiries
• Embrace technology
For new distribution avenues
Determine how automation, robo-advising, blockchain and AI could fit

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Refocus on compliance
• Build in cybersecurity
Business strategy, risk management policies and diligence processes
• Ensure compliance of outsourced tech providers
Verify use of SSAE 18 rather than previous standard
Require SOC 1 & 2 reports

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Consider expansion
• Recognize the hedge fund industry's global nature
Including investors and investments
• Define business size
In the marketplace and among the competition
• Grow by acquiring or being acquired
To realize accrued value

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In considering expansion…
Larger funds are achieving scale through acquisitions,
much of them global.
The average gain of the top 10% of managers went from
20.3% to 32.7% during 2016.3
Midsized funds could grow by acquiring
another fund or selling to a larger fund
for higher valuations.
3 Hedge Fund Journal report
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Reignite Growth in Asset Management

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Expansion of business/investor base?
Alliances and joint ventures could prove valuable.
Example: Asset classes offered by a real estate, pure-play
hedge fund and private equity group under a management
umbrella could be approved by pensions and large
institutions' endowments as an advisor at a high level.
Alternatives: Open up the liquid book to segue into a mutual
fund; outsource office, risk management and other services;
or step up use of exchange-traded funds.

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Revamp strategies and structures.
Reshape to offer products that appeal
to a growing investor base.
Cease fee dependency ─ broaden the organization

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Learn more
about the future of growth in the banking industry
Reignite Growth in
Asset Management
The Future of Growth and the
Asset Management Industry
Watch the webcastRead the report
With downward pressure on hedge fund fees,
time is right for expansion
Read the article

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Michael Patanella
Leader, National Asset Management Sector
Partner, Audit Services
T +1 920 968 6710
E michael.patanella@us.gt.com
David Sites
Partner, International Tax Services
Washington National Tax Office
T +1 202 861 4104
E david.sites@us.gt.com
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